Nanotechnology: Big profits in the science of the small
Matthew Partridge Jan 17, 2013
Nanotechnology has come a long way since its discovery 20 years ago. Now, it could be about to transform our everyday lives – and generate big profits. Adventurous investors should buy in now, says Matthew Partridge.
Human beings have always had a slightly twisted fascination with the many terrible ways in which we might one day destroy ourselves. From fears about nuclear holocaust in the Cold War era, to our present day concerns about climate change, visions of Armageddon are never far from the collective consciousness.
Ten years ago, one of the most outlandish end-of-the-world scenarios briefly achieved headline status – death by tiny robot. In 2003, Prince Charles called on scientists to look more carefully at the dangers posed by the field of nanotechnology – the science of manipulating matter and building objects at the level of individual atoms and molecules (it covers any structure with a size of up to 100 nanometres – one nanometre being a billionth of a centimetre).
This seemingly innocuous suggestion prompted headlines about ‘grey goo’ – an apocalyptic scenario in which tiny, self-replicating robots would go haywire and multiply until there was nothing left of the planet. The world, of course, is still with us. Nanotechnology pioneer Eric Drexler, who first coined the term ‘grey goo’ in 1986, has since said – amid the hysterical headlines – that he wished he’d never used the term. But the nano-revolution itself is in full swing.
In 1990, scientists first proved that deliberate manipulation of objects at the atomic level was possible when a researcher at IBM arranged 35 single atoms into the three letters of the computer giant’s initials. Today, nanotechnology is pushing scientists to rethink many of their assumptions about physics, chemistry and biology. More importantly, it is spawning numerous practical applications that are having a direct impact on everything from textiles to drug delivery.
So how can you profit from these developments? Three key areas stand out from an investment perspective: the use of nanotechnology in creating advanced materials, its role in the food industry, and its potential uses in energy efficiency.
Stretchy phones and magic pills
One key use of nanotechnology is to create more efficient materials. Scientists working in Britain have produced some of the most exciting research in this field. In 2010 Andre Geim and Konstantin Novoselov at the University of Manchester won the Nobel Prize in Physics for pioneering work into one such ‘supermaterial’: graphene. Graphene is a sheet of carbon only one atom thick, and is stronger than diamond, more conductive than copper and as flexible as rubber.
Some suggest that, within a few years, graphene could lead to smartphones and tablets so flexible that you could roll them up in your pocket. Eventually, ‘e-paper’ made of graphene could make the office printer redundant. The potential extends far beyond mobile gadgets. Some experts hope that in the long run graphene could replace the silicon inside computer chips, delivering far higher operating speeds while using much less energy.
So far, much of graphene’s potential remains just that: potential. Yet despite some scepticism over the hype around this ‘miracle’ material, the sheer range of possible uses has sparked a global gold rush. More than 7,000 patents and patent applications have been filed since the material was discovered (again, in Britain) in 2004, according to consultancy CambridgeIP – so much so that Britain is in danger of being left behind.
Less widely known is the use of nanotechnology to create artificial materials that can mimic key properties of human tissue. Hydrogels – which are extremely stretchy and can absorb a lot of liquid – are already taking over as the material of choice for contact lenses. Some firms, such as Cytogel Pharma, are now working on using them as drug delivery devices.
One major problem doctors have with managing chronic conditions is that patients – particularly the elderly – can find it difficult to remember to take their medicines at the right time, or in the right doses. Hydrogels could be used to create a pill that continuously releases a small dose of a drug over a period of months.
Researchers at Japan’s National Institute for Materials Science also think hydrogels could be used to target specific body parts far more accurately. Another possible use would be as a scaffold for bioengineered tissues, making it easier for doctors to regrow damaged body parts.
Nanotechnology is also increasingly used in the food-processing industry. For instance, German firm Aquanova has used it to develop NovaSOL, a range of water-soluble nutrients that can be more readily absorbed by the body. These can be added to everyday foods to make them healthier.
Chemicals giant BASF is using a similar process to add anti-cancer agents to tomatoes. Australian firm Tip Top Bakeries, a subsidiary of Associated British Foods, has even developed ‘nano bread’. This uses nanocapsules to add tuna oil, which contains helpful fatty acids, to bread, without the fishy smell.
One problem with this idea, though, is that consumers are always sceptical about ‘Frankenstein foods’. Yet, while firms tend to be cagey about their research in this area, evidence suggests that almost all of the 20 largest global food manufacturers are quietly investing funds in nanotechnology.
Indeed, Helmut Kaiser Consultancy thinks that “the risk for the food companies lies in not entering” the field. Alex Renton in The Observer also suggests that the health benefits may be so great that governments may end up requiring firms to do this, just as the American and Australian governments already require folic acid to be added to bread and cereals.
Moreover, not all ‘super-foods’ involve alienating notions such as adding fish fat to your morning slice of toast. Others focus instead on changing the underlying structure of a food to make it healthier. Take Soda-Lo, a salt substitute from Tate & Lyle. This works by reducing the size of salt crystals and preventing them from clumping together. Because the mouth’s perception of saltiness derives from the number of crystals, rather than their size, you get the same taste, while consuming less salt overall.
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Companies have also poured billions into research on nano-packaging that could extend the shelf life of products. This is a rapidly growing area, with sales expected to hit $7bn by 2014, from $860m in 2004.
Kodak has developed microbial wrapping that absorbs oxygen, slowing down the rate of decay. Nanocor has produced a plastic bottle than can be used to store beer without affecting its flavour. It’s now working on a version that can sit on shelves for up to 18 months.
Packaging can also help reduce food waste. The Natural Resources Defense Council, an environmental charity, reckons that up to two-fifths of all food bought and grown in Britain, America, New Zealand and Australia is wasted each year. Governments in Europe and Britain are now working with technology firms on sensors that can be inserted into the packaging of food sold in supermarkets, which would tell consumers if food remains fresh, rather than relying on somewhat arbitrary sell-by dates.
There has been substantial progress in other parts of the supply chain too. Researchers at the Massachusetts Institute of Technology have developed sensors that detect ethylene, which can show exactly where food is in the ripening process.
They believe this would allow supermarkets to reduce the amount of food they throw out by around 30%. Combined with other logistics technologies, it could be used to monitor the condition of fruit in warehouses remotely (it’s currently impossible to check every container individually).
Getting energy from algae
Nanotechnology can help make renewable energy more efficient and environmentally friendly. While theoretically ‘carbon neutral’, biofuels such as ethanol require lots of energy to produce. As a result, they have little overall impact on net carbon dioxide emissions.
They also push food prices up by reducing the amount of farmland available for food production. This has resulted in a political backlash that last year forced the European Commission to cap the amount of energy that can come from these sources.
Scientists have been left scrabbling for alternative biofuel sources. One of the most promising is algae. Algae grows in the sea or in lakes, avoiding the pressure on productive land. Better still, it thrives on the waste and fertilisers that run off from the land. You can also grow a lot more, and so yield more fuel, from a far smaller space.
The big problem so far has been actually extracting energy from algae. But specially designed nanomaterials are helping to overcome this obstacle by acting as catalysts to speed up the energy-extraction process. An added benefit of using nanotechnology in this process is that it doesn’t harm the plants, which cuts costs further.
Nanotechnology could also bring the cost of solar technology to the point where it becomes a serious alternative to fossil fuels. Scientists at the National Renewable Energy Laboratory have recently found that it’s possible to use ‘quantum dots’, tiny silicon crystals, to boost the efficiency of solar cells.
This research is still in its early stages. However, if the gains produced in a laboratory setting are reproduced commercially, it could have major implications. Never mind ‘grid parity’ (the point at which power from a renewable source costs the same as that from fossil fuels) – the scientists involved believe that, in the long run, solar power might even become “much cheaper than non-renewable energy sources”.
Replacing the air-conditioner
Cutting energy consumption is another field where nanotechnology is being used. Around the world, as consumers become more wealthy, power-hungry air-conditioning systems are shifting from being considered a luxury to a basic necessity. Indeed, increased use of air conditioning is the largest factor behind the dramatic rise in Middle East energy consumption, a process that could result in Saudi Arabia becoming a net importer of oil within 15 years.
Fortunately, Dais Analytic Corp has developed a product called NanoAir that may be able to replace traditional air conditioners. NanoAir is more efficient, so consumes less power and has other benefits. Conventional refrigeration units use environmentally harmful chemicals.
NanoAir uses just water and nanomaterials, cutting carbon dioxide emissions by nearly 60%. Dais has already won an award from the US Department of Energy to help bring the product to market quickly.
We look at the best ways to profit from nanotechnology below.
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Clearly, nanotechnology is a high-risk, speculative sector. Many products are at early stages of development, and many companies that look exciting right now will fail or go bust before they make it big.
So the best way to get broad-based, diversified exposure to the sector is via venture capital (VC) firm Harris & Harris Group (Nasdaq: TINY). It follows the basic VC model of investing early in young firms, but focuses solely on nanotechnology. It concentrates on three key areas: energy, healthcare and materials.
While most of Harris & Harris’s investments are privately owned, one of the most exciting – Solazyme (Nasdaq: SZYM) – is publicly traded. Solazyme uses nanotechnology to transform plant sugars and algae into oil and industrial chemicals, and uses the same processes to produce substitute foodstuffs and even skin products.
Not only has it forged partnerships with Dow Chemical and Unilever, it recently announced that it had begun producing oil at commercially significant levels.
Another good bet is to invest in a ‘picks and shovels’ play – a company that provides the tools that nanotechnology firms need. FEI Company (Nasdaq: FEIC) makes the powerful microscopes required to carry out experiments and build prototypes on a nanoscale.
While it trades at nearly 21 times earnings, it has seen strong sales growth, and is expanding aggressively in emerging markets. It’s also protecting its profit margins by buying up rival firms with cutting-edge technology.
Several companies are researching graphene, but GrafTec International (NYSE: GTI) has the advantage of experience. It has been involved in the related field of graphite technology for over a century. It has also had a great deal of past success in producing advanced materials for a range of clients, including US space agency Nasa.
It holds a large number of graphene-related patents, which should help protect it from competition. As you might expect, the share price has been volatile, exploding from $5 in early 2009 to a peak of $23 last year, only to fall back to $10 now. But trading below book value and on a price/earnings ratio of around nine, it looks good value for those willing to take a risk.
Nanoco Group (LSE: NANO) is another interesting nanotechnology firm. A spin off from Imperial College London and Manchester University, it focuses on manufacturing ‘quantum dots’, tiny particles that can emit light when a current passes through them. These have the potential to boost efficiency in everything from lighting to solar power, but they are expensiveto manufacture.
However, Nanoco claims to have found a way to make them in large quantities, and without using heavy metals, which are viewed as a health risk. It has recently partnered up with Japanese equipment supplier Tokyo Electron to produce film for a new generation of solar cells.
If you’re willing to accept a very high level of risk (in what is already a speculative sector), you might consider Dais Analytic Corporation (OTC: DLYT), mentioned above. As noted, the company is using nanomaterials to try to produce more efficient, environmentally friendly air conditioning and heating systems.
But it has several other interesting projects, including a water treatment system and an Ultracapacitor, which has a larger capacity than most industrial batteries.
The company is still tiny, with only 26 full-time employees, and is currently in the process of attempting to raise $7m from investors. Along with a $2m infusion from a long-term investor in the summer, this should enable it to pay down debts, while still leaving funds for expansion.
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